By Sunny Oh
U.S. Treasury yields inched higher Tuesday as global equities stayed buoyant amid hopes that the reopening of global economies would revive international growth from its doldrums.
What are Treasurys doing?
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y 0.00% rose 1.7 basis points to 0.689%. The two-year note rate /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y 0.00% gained 0.8 basis points to 0.166%, while the 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y 0.00% added 2.3 basis points to 1.478%.
What’s driving Treasurys?
Bond traders continued to pile on to bets that the spread between long-term and short-term yields would widen amid expectations that the U.S. and global economic recoveries were getting off the ground, and that the Fed would keep short-term rates capped for a long time. Meanwhile, investors looked past the damage wreaked by violent protests in major U.S. cities, largely shrugging off the civil unrest gripping the country.
The yield gap between the two-year note and the 10-year note expanded to 52 basis points, and on another important gauge of the yield curve, the five-year/30-year spread widened to 117 basis points.
A wider gap, or steeper yield curve, can reflect when investors are anticipating economic growth and inflationary pressures, which can dent the prices of longer-term bonds more so than their shorter-term counterparts. This results in the long-dated debt yields rising more quickly than short-dated yields.
At the same time, the yield-curve steepening could reflect growing expectations that the Federal Reserve will enact some type of yield-targeting policies like those seen in Japan. Such measures can steepen the yield curve by fixing short-term rates at a low level through bond purchases.
Investors won’t handle any first-tier economic data on Tuesday, but the rest of the week will see the release of the ISM’s services index and the official jobs report.
What did market participants say?
“As the economy begins the recovery phase of the new business cycle upturn in the weeks ahead, we expect credit spreads will continue to narrow and the [yield] curve to steepen as deflation risks subside,” said Steven Ricchiuto, U.S. chief economist for Mizuho, in a note.
“Outside of the four-year point, Treasury yields are well-anchored. It’s the 30-year that’s been taking the brunt of the selloff. Yield-curve control is part of that story,” said Mark Cabana, head of U.S. short rates strategy at BofA Global Research, in an interview with MarketWatch.